Notice that the cost, C, of making and investigating a claim and the costf(J) - J of making the transfer do not appear in the expression for the average payoff. These costs do appear in condition (6): The Law Merchant system is not viable if the cost of making and investigating a claim or the cost of paying a judgment is too high, for then the traders cannot reasonably expect that the others will make claims and pay judgments when they should. However, once these costs are low enough that the threat to file claims with the Law Merchant is credible, they act only as a deterrent: These costs are never actually incurred at equilibrium in our model of the Law Merchant system.

DEFINE: Clarifies how a legal system's viability condition differs from its equilibrium behavior — costs matter for credibility but vanish from equilibrium payoffs.

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 130